Watchdog tightens screws on super funds’ spending

Funds are trying to cut costs not directly linked to investments amid the scrutiny, which has targeted advertising spends, payments to unions and doubling up on memberships to industry groups.

The funds will also have to better explain how fees are set. The proposed legislation requires that it be done “prudently and transparently” and that charges are “appropriate and proportionate” and comparable to the broader industry.

Funds’ boards will have to sign off on any new fees. The proposed changes in general slate more responsibility back to directors, especially regarding funds’ business plans, which will have to be more detailed and modelled across a range of scenarios under the changes.

Super funds’ use of financial “reserves” will also get more scrutiny. Several super funds have won court approval to shield their directors from any fines for misconduct, instead setting up multimillion-dollar war chests with which to pay penalties from members’ money.

AustralianSuper is the latest fund to draw on these reserves, admitting last week it would finance any fines stemming from a Federal Court case brought by the corporate watchdog over its failure to consolidate the accounts of more than 90,000 members.

Under APRA’s proposal, funds would have to review their reserves regularly to make sure they are still appropriate given their customer demographic and circumstances and adequately overseen.

Retirees in focus

Finally, funds will have to show that any expenditure plans regarding their retired members’ savings align with the retirement income covenant as well as their financial interests.

Under the covenant, super funds are legally obliged to help members prepare for retirement as a tsunami of Baby Boomers exiting the workforce begins. But a scathing review into funds’ progress on this in July found that they were largely falling short on this duty, leaving older members in the dark about their savings or how to spend them.

Ms Cole said the reforms were among the watchdog’s biggest priorities in superannuation.

“Updating [this standard] will ensure trustees have robust business operations and are held to account to deliver outcomes that are in the best financial interests of their members.”

The watchdog also announced it was retiring its guidance on how funds met the sole purpose test, which requires they only act in members’ best financial interests.

Funds had asked for an updated circular, but Ms Cole said the superannuation system was far more mature than it was when the guidance was introduced more than 20 years ago, and that APRA’s expectation was that funds should now know how to meet their legal duties themselves.

APRA has opened a consultation for the proposed changes, which will run until December 21. The proposed legislation would kick into force from 2025.